Question

Problem 3.34A a-c Nicole Limited is a company that produces machinery to customer orders, using a normal job-order cost system. It applies manufacturing overhead to production using a predetermined rate. This overhead rate is set at the beginning of each fiscal year by forecasting the year's overhead and relating it to direct labour costs. The budget for 2020 was as follows: Direct labour Manufacturing overhead $1,805,000 902,500 As at the end of the year, two jobs were incomplete. These were 1768B, with total direct labour charges of $110,500, and 1819C, with total direct labour charges of $390,600. On these jobs, machine hours were 287 hours for 1768B and 647 hours for 1819C. Direct materials issued for 1768B amounted to $221,000, and for 1819C they amounted to $420,600. Total charges to the Manufacturing Overhead Control account for the year were $903,500, and direct labour charges made to all jobs amounted to $1,582,000, representing 247,500 direct labour hours. There were no beginning inventories. In addition to the ending work in process just described, the ending finished goods inventory account showed a balance of $557,300. Sales for the year amounted to $6,201,300; cost of goods sold totalled $3,622,450; and sales, general, and administrative expenses were $1,851,800. The above amounts for inventories and the cost of goods sold have not been adjusted for any over- or under-application of manufacturing overhead to production. It is the company's practice to allocate any over- or under-applied overhead to inventories and the cost of goods sold. Calculate the under- or over-applied manufacturing overhead for 2020. (Round answer to the nearest whole dollar, e.g. 5,275.) Manufacturing overhead 112500 Under-applied

Answer 1

1. Budgetted Overhead per labour cost =>902500/1805000 = 0.5

Actual Direct labor costs => 1582000

Actual Overheads => 903500

Applied overheads based on budget 1582000*0.5 = 791000. So Under-applied Overhead = 112500.

2. Apportionment of Under-application of Overhead:

Cost of Goods sold	3622450
Finished goods	557300
WIP (note below)	1393250
TOTAL	5573000

WIP = Direct Materials (221000+420600) + Direct Labor (110500+390600) + Manufacturing O/H (110500+390600)*0.5 = 1393250

So, Allocation:

Cost of Goods Sold	112500*(3622450/5573000)	73125
Finished Goods	112500*(557300/5573000)	11250
WIP Inventory	112500*(1393250/5573000)	28125

3. Income Statement

Sales		6,201,300
Less
Adjsuted Cost of goods sold	3622450+73125	3,695,575
Gross profiit		2,505,725
Less
Operating expenses		1,851,800
Net income before taxes		653,925
Taxes	653925*40/100	261,570
Net Income/(losses)		392,355

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